Gurgaon, Haryana

The extension in the scope of the Emergency Credit Line Guarantee Scheme (ECLGS) will support the liquidity of around one-third of mid and emerging corporates, according to India Ratings and Research (Ind-Ra). Ind-Ra expects the extension in ECLGS to support the liquidity of around one-third of mid and emerging corporates. The liquidity cushion will improve in CDGS, FMCG, industrials and basic materials sectors.

The additional funds made available for their working capital requirements along with extending the moratorium period in their previously availed ECLGS loans would lower repayment obligations in FY22. 

 

This will provide an opportunity for MECs to swap their previous availed high interest-bearing term loans with lower cost ECLGS loans. ECLGS’s rate of interest is capped at 9.25% for banks and 14% for the non-banks due to which a cost reduction of up to 200bp can be easily achieved. 

The report by Raj Kishor, Senior Analyst, India Ratings and Research Pvt Ltd, stated that the working capital of MECs remaining stuck either in form of inventory or with debtors due to the extension in localised lockdown will remain a key concern as it might deplete the newly sanctioned funds in short term.

Ind-Ra analysed entities in its MEC portfolio rated in the three months ending May 2021. Out of which, the basic materials sector comprises 19%, consumer discretionary goods and services (CDGS) 37%, fast-moving consumer goods (FMCG) 8%, healthcare 8%, industrials 22% and others 5%.

Ind-Ra expects that of the remaining Rs 0.46 trillion of the Rs 3 trillion funds under ECLGS, the share of funds getting sanctioned will be higher in the most stressed CDGS and FMCG sectors. The percentage of rated entities in these sectors with expected liquidity score below 1.2x in FY22 is 29% and 18%, respectively. 

Along with CDGS and FMCG, there was a sizeable portion of the other key sectors which could dig in the remaining Rs 0.46 trillion funds. If the bracket is extended to the expected liquidity score below 1.5x in FY22, then the entities falling in the bracket significantly increase to 51% in CDGS (1.2x: 29%) and at 30% (1.2x: 13%) in FMCG, in basic materials 27% (1.2x: 15%) and in healthcare 27% (1.2x: 13%).

The second COVID-19 wave led to disruptions majorly for the CDGS, FMCG and industrial sectors along with some impact in the basic materials sector. There has been significant dependence on the bank limits by MECs rated in these sectors in the last three months compared to the preceding three months which reflects the presence of liquidity stress. 

Since the requirement for liquidity support has increased in MECs, it will be crucial for MECs to quickly assess the requirement and apply for the loan as the lenders might consider MECs on a first-come-first-serve basis, given the limited scope of funds available. 

The liquidity cushion will improve in the key sectors such as CDGS, FMCG, industrials and basic materials sectors. While a sizeable portion of these MECs might continue to fully utilise their bank limits along with availing additional funds due to weaker collections, the additional funding will provide the much-needed liquidity support to continue their operations.

In May 2020, the government launched ECLGS and allocated Rs 3 trillion for MECs over their existing credit lines. In January 2021, Rs 2.14 trillion of term loans were already sanctioned to 9.06 million borrowers (average of Rs 0.24 million per borrower), out of which Rs 1.66 trillion was already disbursed to 42,46,831 borrowers. In May 2021, the sectioned loan amount was increased to Rs 2.54 trillion after which the ECLGS funds available for sanctioning stood at around Rs 0.46 trillion. If there is a similar trend in borrowings then it will be able to cover 1.9 million additional borrowers. In May 2021, the government extended the scope of ECLGS to cover the business disruptions caused by the second COVID-19 wave by sanctioning term loans to an extent of the remaining Rs 0.46 trillion.

Source - India Ratings and Research